Yesterday after market close, CEC Entertainment (NYSE:CEC), owner of the venerable child-friendly Chuck E. Cheese restaurants, reported preliminary third-quarter results. The market clearly liked the results, sending the shares up almost 10% so far today, and the stock could be in the market for even further runs.
Total sales for the quarter increased 8.4%, driven by new store openings and an impressive 5% increase in same-store sales. Food and beverage sales account for about 65% of total sales annually. For the quarter, this category made up 62% of the total and grew 5.1% as compared to the third quarter last year. Game and merchandise sales make up the majority of the rest and grew a nice 14.5% for the quarter.
Net income advanced 17.5% while diluted earnings grew 32% to $0.54 as the company repurchased its common stock. Overall results were preliminary, as CEC is reviewing its stock option practices. While the review is ongoing, the company press release detailed that CEC's audit committee found no evidence of fraud or other serious misconduct, but did find certain "administrative errors, record-keeping deficiencies and other defects in the stock option granting process" that will amount to pre-tax charges of $10 million-$35 million. There could be some additional charges, but the matter looks to be mostly resolved and was not as serious as some investors feared.
CEC is unique as a restaurant company in that it has game and merchandise offerings to drive dining traffic, or vice versa. It's also one of the only publicly traded restaurant concepts catering largely to children between the ages of two and 12 whose demand to play games brings mom and dad in for dinner. I can't think of many other companies with this type of mix, save for CBRL Group (NASDAQ:CBRL) with its Cracker Barrel restaurants and country retail stores.
The combination of food, retail, and entertainment takes more than just running a staff of cooks and servers, but it can be a good differentiator in the crowded retail industry. In other words, CEC and CBRL can compete with other sales avenues, while Applebees (NASDAQ:APPB), Cheesecake Factory (NASDAQ:CAKE), O'Charleys (NASDAQ:CHUX), or Steak N Shake (NYSE:SNS) must slug it out with menu offerings that can be as differentiated as eating the same leftovers night after night.
And while CEC isn't growing as rapidly as it used to, with only 477 stores nationwide and 45 franchised stores as of quarter's end, it still has room to expand. In fact, in its most recent 10-K filing, it detailed having an eye on at least 200 other potential sites for store development. Additionally, it's actively buying out franchisees to gain better control over remodeling initiatives and more prudently manage capex needs.
Operating cash flow generation at CEC is strong, and while most of that is plowed back into opening new stores and refurbishing older ones, there's still free cash flow available to repurchase shares.
Management isn't offering any forward earnings guidance because of the stock options investigation, but based on analyst projections for this year, CEC is trading at just less than18 times earnings and 16 times next year's projections. That's not overly cheap, but if comparable sales stay positive and the company continues to expand its store base, shareholders could duly be rewarded with this well-positioned restaurant chain.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.
